An actuarial report on the Old Age Security Program for the first time calculates the long-term impact of a popular tax shelter that was created by the Conservative government in 2009.
Tax-free savings accounts, or TFSAs, allow Canadians to save up to $5,000 each year with all earnings and withdrawals exempt from taxation.
TFSAs also come with another big plus: none of the money counts when determining whether the account-holder is entitled to a retirement benefit for low-income seniors.
The Guaranteed Income Supplement currently provides a basic maximum of $665 a month for a single senior, but the amount paid out is reduced or eliminated if the recipient has significant other income.
The official report from chief actuary Jean-Claude Menard, tabled in the summer when Parliament was not sitting, calculates that excluding TFSA money from the means-test for that benefit will cost the federal government an extra $4.2 billion annually by 2050.
That's because as more Canadians see significant growth of wealth inside tax-sheltered TFSAs, they will nevertheless be eligible for the Guaranteed Income Supplement, or GIS.
And rising payouts of the low-income supplement will increase even further if the Tory government eventually raises the annual savings limit to $10,000, as promised in the May 2 election campaign.
"GIS annual expenditures are projected to reach $38.9 billion in 2050, including the effect of TFSAs," says the report.
"This represents an increase of $4.2 billion or 12 per cent in GIS annual expenditures in 2050 compared to projected GIS expenditures without the effect of TFSAs."
Menard's report, due every three years, concludes:
"As investments in TFSAs grow over time and as such, an increasing amount of TFSA-related income is excluded from the determination of program benefits, (GIS) program expenditures will increase as greater numbers of recipients and higher amounts of benefits will result than would otherwise be the case."
Jon Kesselman, a professor in the school of public policy at Vancouver's Simon Fraser University, says an individual saving diligently from age 18 to age 65 could accumulate as much as $1 million in a TFSA account with good investment returns.
Yet, this wealthier individual would still be eligible to collect the low-income supplement — a public-policy contradiction he calls a "looming problem."
Although the drain of GIS money by well-off Canadians is modest now, Kesselman says, it will grow and a future government will likely have to change the rules to ensure those with fat TFSAs are denied the poverty supplement.
"Common sense tells us that at some point in the future, government will change the policy," he said in an interview.
"Better to address this sooner rather than later so that people have honest, accurate expectations about how they're going to be treated. ... I don't see any reason for governments to wait until it's a sizable issue."
Kesselman also says doubling the annual TFSA contribution limit to $10,000, which Prime Minister Stephen Harper pledged to do when Ottawa's books are balanced, will provide "a very disproportionate benefit to higher earners."
That's because middle- and low-income earners are already unable to save enough to take advantage of existing tax shelters, including RRSPs, under the current limits.
The federal government should consider measures to offset the benefits TFSAs provide the rich, including increasing the upper income-tax bracket, Kesselman said.
The Finance Department says its internal 2008 analysis of the impact of TFSAs on the Guaranteed Income Supplement is in line with the numbers in Menard's July report.
Spokesman Jack Aubrey also says the actuarial report shows TFSAs have achieved their main purpose, that is, encouraging everyone — especially low- and modest-income Canadians — to save. And part of their effectiveness is the exclusion of TFSA withdrawals and income from means-testing for GIS benefits.
"Over three-quarters of the benefits of saving in a TFSA (in the first five years) will go to individuals in the two lowest tax brackets," Aubrey said in an email.
An individual can deposit up to $5,000 a year in TFSAs, though there is no income-tax break for doing so, as RRSPs offer.
Rather, the money accumulating inside an TFSA is exempt from taxation and can be withdrawn any time without tax penalty. RRSP funds are also untaxed inside the account, but are subject to tax on withdrawal.
As of Dec. 31 last year, 6.7 million Canadians had TFSA accounts with total assets of almost $43 billion.